Question

Witten Entertainment is considering buying a machine that costs $555,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $130,000. The company can issue bonds at an interest rate of 6 percent. The corporate tax rate is 25 percent. What is the NAL of the lease? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

Based on the given data, pls find below steps, workings and answer:

Net Advantage of Leasing = $ 27401.44; Its positive and hence, the lease option is recommended over the Buy option;

This is calculated by difference of the NPVs of both the options - Buy or Lease

factor% are considered same.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;